Regulatory: Unknowing company executives held responsible for FDCA violations

Recent focus on the Park Doctrine—an expansive theory of liability under which company executives can be held personally responsible for violations of the federal Food, Drug, and Cosmetic Act (FDCA) even without knowledge of or participation in the misconduct—has garnered much attention.

In 2007, three senior executives of Purdue Pharma pled guilty to misbranding violations of the FDCA and were subsequently excluded from federal health care programs, even though these executives were unaware of the actual illegal promotional activity. Similarly, four executives from Synthes, a spinal implant manufacturer, pled guilty as responsible corporate officers to misdemeanor charges and in 2011 were sentenced to five to nine months each, on the theory that they were in a position to prevent or correct misconduct but failed to do so. This focus illuminates a growing trend in government enforcement within the health care sector: an increased focus on senior executives.

Focus on Senior Executives in Corporate Integrity Agreements

In exchange for its release of the authority to exclude from participation in federal health care programs organizations found or alleged to have engaged in misconduct, the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) frequently requires organizations to enter corporate integrity agreements (CIAs), committing to adopt particular compliance obligations for a five-year period.

Increasingly, CIAs include provisions designed to hold senior executives accountable for companywide compliance. One common provision requires senior executives, on an individual basis, to certify annually that the company is complying with its obligations under the CIA and with applicable requirements of law. False certifications could lead to liability for both the executive and the company under the CIA. A newer provision, which appeared in the 2012 GlaxoSmithKline CIA, requires the company to establish a “financial recoupment program” under which a senior executive can be forced to forfeit up to three years’ pay if the executive is found to be involved in “significant misconduct,” including a failure to prevent misconduct engaged in by subordinate employees.

Individual OIG Exclusion of Senior Executives

OIG’s exclusion authority reaches to individuals as well as to organizations. OIG published guidance in October 2010 outlining the factors it considers in exercising its “permissive exclusion authority” with respect to the owners, officers, and managing employees of excluded companies. Unlike an owner, who cannot be excluded unless the owner knew or should have known of the prohibited conduct, officers and managing employees can be excluded based solely on their position of authority (and operational control) within the company. According to the guidance, OIG “will operate with a presumption in favor of exclusion” for those officers and managing employees who knew or should have known of the misconduct.

For other officers and managing employees, the guidance explains that OIG will weigh factors such as the seriousness of the offense, the individual’s degree of control over the company’s operations, and the individual’s actions in response to the misconduct (for example, “[i]f the individual can demonstrate either that preventing the misconduct was impossible or that the individual exercised extraordinary care but still could not prevent the conduct, OIG may consider this as a factor weighing against exclusion.”)

While an individual exclusion does not carry criminal sanctions, the punishment can prevent the individual from holding any future position within the health care industry and so is of enormous significance. The parallels to the Park Doctrine are not accidental: the guidance explains that the factors employed by OIG are derived in part from “the responsible corporate official doctrine established in case law, including U.S. v. Park.” According to OIG, this approach allows the agency to appropriately allocate its “finite resources to actions that have the most remedial and deterrent effect,” and “will positively influence… future behavior… by holding individuals accountable for misconduct within entities in which they are in positions of responsibility.”

Prosecution of Senior Executives Under the Park Doctrine

Reflecting the OIG guidance published a few months earlier, FDA guidelines published in 2011 for pursuing misdemeanor prosecutions under the Park Doctrine describe a flexible approach that weighs factors related both to the individual’s position within the company and the nature of the offense. As is the case with individual exclusions by the OIG, an executive’s knowledge of or participation in the misconduct is one factor considered, but not required, in the agency’s analysis. Other factors set forth in the FDA Regulatory Procedures Manual (Section 6-5) include “whether the violation involves actual or potential harm to the public; whether the violation is obvious; whether the violation reflects a pattern of illegal behavior and/or failure to heed prior warnings; whether the violation is widespread; whether the violation is serious; the quality of the legal and factual support for the proposed prosecution; and whether the proposed prosecution is a prudent use of agency resources.”

Takeaway

While the limits of the “responsible corporate official” doctrine may not be settled as a legal matter, federal agencies have shown increasing interest in making clear government expectations regarding a senior officer’s responsibilities for compliance and bringing actions against those who have not met those expectations, even if the executives played no direct role in the misconduct. As a result, senior executives are becoming increasingly mindful of reports, reporting, and management structures around compliance, to help them meet, and to have confidence in meeting, those expectations.

Contributing Author

Michael Lampert

Michael Lampert is a health care partner with Ropes & Gray. He is based in the firm’s Boston office.